Fuel price hike hint in lower subsidy logic

New Delhi, Feb. 27: The prices of diesel, domestic LPG and electricity may rise with the economic survey making a strong pitch for aligning them with global rates to pare the ballooning subsidy bill.

“The extent of misalignment is substantial, leading to large untargeted subsidies. Aligning domestic energy prices with global prices, especially when large imports are involved, may be the ideal option as misalignment can pose both micro and macro-economic problems,” chief economic adviser Raghuram Rajan said.

Even as the finance minister pulls out all the stops to cap the fiscal deficit, the subsidy bill will overshoot the target of Rs 1.79 lakh crore in this financial year because of higher crude oil prices.

The government had fixed the oil subsidy at Rs 43,580 crore, food subsidy at Rs 75,000 crore and fertiliser subsidy at Rs 60,974 crore for 2012-13.

“Cutting wasteful subsidies may reduce market distortions, shrink excess consumption and increase confidence about the government’s finances, all of which can help growth, even in the short run,” Rajan said.

However, analysts said “with 2014 round the corner and the middle class reeling under regular fuel price hikes, it may be a difficult decision to push through”.

The survey also states the need to revise natural gas pricing and incentivise power projects by resolving coal production hurdles.

It called for efforts to contain subsidies through better targeting and reducing leakages involved in delivery. One such initiative is the direct benefit transfer scheme, the survey pointed out.

The document also indicated that the cut in energy subsidy could be used to fund the food security bill.